Target-Date Funds Making Retirement Planning Easier
McCallen, Joan, Public Management
With so many options in the marketplace, selecting the combination of mutual funds that will best meet individual goals can prove challenging for many investors. For those retirement plan investors who are looking for a straightforward way to invest, target-date funds continue to be a popular option.
Target-date funds, also known as life-cycle funds, provide an all-in-one strategy that simplifies investing by incorporating automatic aging and rebalancing into the design. Investors simply pick a fund with a target date closest to the year in which they want to retire or to begin withdrawals. The investment portfolio and associated risks are aligned with that specific target date.
Over time, target-date funds age to reflect an increasingly conservative asset mix (that is, an increased amount of the fund's assets are moved from equity to fixed-income funds) as the target date draws near. Rebalancing--maintaining a target balance between equity and fixed-income funds--helps the fund's allocations to remain on track.
Many retirement plan providers, including ICMA-RC, offer a wide range of target-date funds. For investors in or near retirement, funds that are typically more conservative, such as one focused on preserving retirement income or one with a target withdrawal date as early as 2010 are available. Investors with longer retirement time frames or distribution dates have a selection of funds going out to 2045 and sometimes even further.
Our experience tells us that public employees regard target-date funds as an attractive investment option. Our target-date funds have been well received by plan sponsors, and most plan sponsors have selected them as their qualified default investment alternative (QDIA). …